Mutual funds are investment vehicles that allow groups of investors to combine their financial resources to purchase large portfolios of stocks, bonds and other securities. They’re a good investment option for the average investor since a single share of a mutual fund gives you exposure to hundreds of stocks or bonds. This diversifies your investment dollars and reduces the risk that any one company will cause your investment to lose value.

Mutual funds invest in baskets of securities, like stocks and bonds. A fund manager decides what to include in the mutual fund and when to buy and sell holdings. For people who don’t have the time, education, money or willingness to manage a large portfolio of investments, mutual funds are an excellent option.

For many people, mutual funds are a better investment choice than individual stocks and bonds for the following reasons:

Professional management. The fund manager does all of the research and monitors the performance of the securities for you.

Diversification. By investing in a mutual fund, you invest in a range of securities rather than just one or two.

Low Costs. Mutual funds are relatively affordable and let you purchase hundreds of securities for a fairly low cost.

Mutual funds and exchange-traded funds (ETFs) both involve investing in baskets of securities and are generally less risky than investing in individual stocks or bonds. However, there are a few key differences:

Trading Options. You can buy and sell ETFs throughout the day with real-time pricing. By contrast, mutual funds can only be bought or sold at the end of the day after the market closes. Again, for long-term investors this distinction may not be significant as you aren’t generally trying to time the market for particular prices.

Lower costs. ETFs never charge load commissions, and trading ETFs is free of commissions at most brokerages. This is not always the case with mutual funds, so make sure you understand any applicable fees your brokerage may charge before buying mutual funds there. ETFs are nearly always passive investments, like index funds, and charge much lower expense ratios than actively managed mutual funds. Some mutual funds, however, are index funds like ETFs and charge comparable expense ratios.

Identifying the best mutual funds is dependent on your financial goals and risk tolerance. However, one of the most popular mutual fund strategies is to take advantage of index funds. Index funds are mutual funds that track the performance of a certain stock market index, such as the Dow Jones Industrial Average, the NASDAQ Composite Index or the S&P 500. With index funds, you don’t have to worry about picking winning stocks yourself. And while index funds’ performance will never exceed the overall market’s, historically, they do generally outperform actively managed mutual funds that charge higher fees.